Our Writings

April Fools! S&P continues bounceback for a 17% gain

March was the longest year, but April seemed like a quick
week. The S&P’s 17% gain for April
made it the best April in several decades, continuing its 30% bounceback from
the thrashing it bounced back from since late March.

The long March and short April brought a few points home.

Emotions are not an Investor’s Friend

During tumultuous times like this, it can be very tempting
to attempt to time the market. It certainly
tempts me. We’re not wired to be able to
withstand the pain of losing money without trying to do something. Clients who call to discuss whether it’s a
good time to exit the market always get some variation of “I have no crystal
ball and can’t foresee the market; but let’s balance short term needs (safety)
with long term goals.”

Market Timing

But why not just get out of the market? As we stated in last month’s newsletter, it
simply takes driving down empty roads to know we’re in a recession. Several clients called wanting to reduce risk
for that very same reason. If we’re in a
recession, let’s get out! I don’t blame
them, my gut tugs at me the same way. To
further add to the feeling, we still have not experienced any of the
bankruptcies that are likely to occur in the directly impacted industries (i.e.
travel, restaurant, entertainment, oil, etc.).

To properly time the market, you need to:

Have a variant viewpoint from the market,

Be correct, and

Know when to re-enter the market (the toughest
part).

In this case, we knew we were in a recession, yet so did
everybody else. That gives us no
edge. The question is how deep this
recession will be. On Wednesday, the Bureau
of Economic Analysis announced their estimate for Q1 GDP; a drop of 4.8%[1]
and the market…went up.

The Market is a
discounting mechanism

The market had already digested that GDP would be negative
for the quarter and was focused on potential vaccine information and how that
will impact GDP and profits in the back half of this year and into 2021. How far out is the market discounting- and
what factors is it using to discount; frankly no one really knows what is
impacting the aggregate of all market participants!

Market Timing: Do
it again

To properly time the market since our last update, we would
have had to added risk to portfolios- which is the exact opposite of our
instincts and the calls we have been fielding from clients. But, assuming we would have done that (we did
not) we then need to make another decision: when should we reduce the
risk? Reducing the risk is difficult to
time, but increasing the risk is both difficult to time and emotionally
difficult. I’ve witnessed many investors
reduce their risks, only to be unable to stomach buying in to the market at a
higher rate.

Our solution is the boring one. We don’t believe ourselves particularly skilled
at timing the market so we don’t. Over
time, volatility and risk in the markets is what provides the risk premium
that, over the long term, provides holders of equity higher returns. The
majority of our research produces no actionable result, but it is valuable
nonetheless in our asset allocation and security selection decisions.